A study by Olubunmi Faleye ... finds support for the hypothesis that firms actively weigh the costs
and benefits of alternative leadership structures in their unique circumstances
and concludes that requiring a one size fits all model
separating the CEO and Chairman positions may be counterproductive.[1]
Another study by James Brickley, Jeffrey Coles, and Gregg A. Jarrell found “preliminary
support for the hypothesis that the costs of separation are larger than the
benefits for most firms.”[2]
As John Coates summarizes the field, the evidence is mixed, at best:

At least 34 separate studies of the differences in the
performance of companies with split vs. unified chair/CEO positions have been conducted
over the last 20 years, including two “meta-studies.” … The only clear lesson
from these studies is that there has been no long-term trend or convergence on
a split chair/CEO structure, and that variation in board leadership structure
has persisted for decades, even in the UK, where a split chair/CEO structure is
the norm.[3]

Although Coates concludes that
splitting the CEO and Chairman positions by legislation “may well be a good
idea for larger companies,” he further concludes that mandating such a split “is
not clearly a good idea for all public companies.”[4]

In my view, proponents of a mandatory non-executive Chairman
of the Board have overstated the benefits of splitting the positions, while
understating or even ignoring the costs of doing so. Michael Jensen identified
the potential benefits in his 1993 Presidential Address to the American Finance
Association, arguing that: “The function of the chairman is to run the board
meetings and oversee the process of hiring, firing, evaluation, and compensating
the CEO. … Therefore, for the board to be effective, it is important to
separate the CEO and Chairman positions.”[5]
In fact, however, overseeing the “hiring, firing, evaluation, and compensating
the CEO,” is the job of the board of directors as a whole, not just the
Chairman of the Board.

To be sure, in many corporations, the Chairman of the Board
is given unique powers to call special meetings, set the board agenda, and the
like.[6]
In such companies, a dual CEO-Chairman does wield powers that may impede board
oversight of his or her performance. Yet, in such companies, the problem is not
that one person holds both posts; the problem is that the independent members
of the board of directors have delegated too much power to the Chairman. The
solution is to adopt bylaws that allow the independent board members to call
special meetings, require them to meet periodically outside the presence of
managers, and the like.

Turning from the benefit side to the cost side of the
equation, even if splitting the posts makes it easier for the board to monitor
the CEO, the board now has the new problem of monitoring a powerful
non-executive Chairman. The board now must expend effort to ensure that such a
Chairman doesn’t use the position to extract rents from the company and,
moreover, that the Chairman expends the effort necessary to carry out the post’s
duties effectively. The board also must ensure that a dysfunctional rivalry
does not arise between the Chairman and the CEO, both of whom presumably will
be ambitious and highly capable individuals. In other words, if the problem is “who
watches the watchers?,” splitting the two posts simply
creates a second watcher who also must be watched.

In addition, a non-executive Chairman inevitably will be
less well informed than a CEO. Such a Chairman therefore will be less able to
lead the board in performing its advisory and networking roles. Likewise, such
a Chairman will be less effective in leading the board’s in monitoring top
managers below the CEO, because the Chairman will not know those managers as
intimately as the CEO.

[2] James A.
Brickley et al., Corporate Leadership Structure: On the Separation of the
Positions of CEO and Chairman of the Board, Simon School of Business Working
Paper FR 95-02 (Aug. 29, 2000), http://ssrn.com/abstract=6124.

[6] James
Verdonik and Kirby Happer, Role of the Chairman of the Board 2 (explaining that “one of the duties of the Chairman is to
call meetings of the Board of Directors and the shareholders. … Chairmen often
set the agenda for Board meetings”), www.directorsforum.com
/role-of-the-chairman-verdonik-happer.pdf.

A study by Olubunmi Faleye ... finds support for the hypothesis that firms actively weigh the costs
and benefits of alternative leadership structures in their unique circumstances
and concludes that requiring a one size fits all model
separating the CEO and Chairman positions may be counterproductive.[1]
Another study by James Brickley, Jeffrey Coles, and Gregg A. Jarrell found “preliminary
support for the hypothesis that the costs of separation are larger than the
benefits for most firms.”[2]
As John Coates summarizes the field, the evidence is mixed, at best:

At least 34 separate studies of the differences in the
performance of companies with split vs. unified chair/CEO positions have been conducted
over the last 20 years, including two “meta-studies.” … The only clear lesson
from these studies is that there has been no long-term trend or convergence on
a split chair/CEO structure, and that variation in board leadership structure
has persisted for decades, even in the UK, where a split chair/CEO structure is
the norm.[3]

Although Coates concludes that
splitting the CEO and Chairman positions by legislation “may well be a good
idea for larger companies,” he further concludes that mandating such a split “is
not clearly a good idea for all public companies.”[4]

In my view, proponents of a mandatory non-executive Chairman
of the Board have overstated the benefits of splitting the positions, while
understating or even ignoring the costs of doing so. Michael Jensen identified
the potential benefits in his 1993 Presidential Address to the American Finance
Association, arguing that: “The function of the chairman is to run the board
meetings and oversee the process of hiring, firing, evaluation, and compensating
the CEO. … Therefore, for the board to be effective, it is important to
separate the CEO and Chairman positions.”[5]
In fact, however, overseeing the “hiring, firing, evaluation, and compensating
the CEO,” is the job of the board of directors as a whole, not just the
Chairman of the Board.

To be sure, in many corporations, the Chairman of the Board
is given unique powers to call special meetings, set the board agenda, and the
like.[6]
In such companies, a dual CEO-Chairman does wield powers that may impede board
oversight of his or her performance. Yet, in such companies, the problem is not
that one person holds both posts; the problem is that the independent members
of the board of directors have delegated too much power to the Chairman. The
solution is to adopt bylaws that allow the independent board members to call
special meetings, require them to meet periodically outside the presence of
managers, and the like.

Turning from the benefit side to the cost side of the
equation, even if splitting the posts makes it easier for the board to monitor
the CEO, the board now has the new problem of monitoring a powerful
non-executive Chairman. The board now must expend effort to ensure that such a
Chairman doesn’t use the position to extract rents from the company and,
moreover, that the Chairman expends the effort necessary to carry out the post’s
duties effectively. The board also must ensure that a dysfunctional rivalry
does not arise between the Chairman and the CEO, both of whom presumably will
be ambitious and highly capable individuals. In other words, if the problem is “who
watches the watchers?,” splitting the two posts simply
creates a second watcher who also must be watched.

In addition, a non-executive Chairman inevitably will be
less well informed than a CEO. Such a Chairman therefore will be less able to
lead the board in performing its advisory and networking roles. Likewise, such
a Chairman will be less effective in leading the board’s in monitoring top
managers below the CEO, because the Chairman will not know those managers as
intimately as the CEO.

[2] James A.
Brickley et al., Corporate Leadership Structure: On the Separation of the
Positions of CEO and Chairman of the Board, Simon School of Business Working
Paper FR 95-02 (Aug. 29, 2000), http://ssrn.com/abstract=6124.

[6] James
Verdonik and Kirby Happer, Role of the Chairman of the Board 2 (explaining that “one of the duties of the Chairman is to
call meetings of the Board of Directors and the shareholders. … Chairmen often
set the agenda for Board meetings”), www.directorsforum.com
/role-of-the-chairman-verdonik-happer.pdf.